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OpenMarket: Banking and Finance

  • Democratic Judges Green-Light CEI’s Challenge to Dodd-Frank

    July 24, 2015 3:27 PM

    Just days after President Obama touted the supposed achievements of the Dodd-Frank financial reform law on its fifth birthday, a unanimous judicial panel—including an Obama appointee—dealt the administration a major defeat in its defense of the law. If the co-plaintiffs in the case—the Competitive Enterprise Institute, the 60 Plus Association, and a courageous Texas community bank––ultimately prevail, it will be a huge victory for American consumers and entrepreneurs being strangled by the red tape of Dodd-Frank and its Consumer Financial Protection Bureau (CFPB).

    Today, a three-judge panel of the D.C. Circuit Court ruled unanimously that State National Bank of Big Spring, Texas, had standing to challenge the constitutionality of the Consumer Financial Protection Bureau, the massive bureaucracy created by Dodd-Frank with virtually no accountability to Congress. The decision, written by Judge Brett Kavanaugh, a George W. Bush appointee, was joined by Clinton appointee Judith Rogers and Obama appointee Nina Pillard.

    The Democrat-leaning panel criticized the D.C. federal district court for its bizarre ruling that, despite the fact that State National Bank was directly subject to the CFPB’s edicts, it somehow didn’t suffer injuries serious enough to have standing to challenge the Bureau. (Bank president Jim Purcell testified before Congress that the bank even had to stop issuing new mortgages and wire transfers because of CFPB rules.)

    “The Supreme Court has stated that ‘there is ordinarily little question” that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated,” states the D.C. Circuit’s opinion. “So it is in this case”

  • Not Dodd-Frank, Not Glass-Steagall, But Real Competition to End TBTF

    July 20, 2015 9:46 AM

    Progressives cheered Hillary Clinton last week when she said policy makers need to “go beyond Dodd-Frank.” She didn’t rule out repeal of some sections, but most took it to mean preserve virtually all of the law—which turns five on July 21—plus expand government intervention further into banking.

    But that praise was short-lived when Clinton’s economic adviser Alan Blinder told Reuters, “You’re not going to see Glass-Steagall” reinstated in her administration. The New Deal-era Glass-Steagall Act separated commercial and investment banking until it was partially repealed by the Gramm-Leach Bliley Act, which passed Congress overwhelmingly in 1999 and was signed into law by Clinton’s husband, President Bill Clinton.

    There seems to be a bipartisan chorus for Glass-Steagall restoration, from Clinton’s self-proclaimed socialist rival Bernie Sanders to conservative GOP candidate Ben Carson. These politicians tap into a frustration on the left and right that on the fifth anniversary of the so-called Dodd-Frank “financial reform,” too-big-too-fail banks are more entrenched than ever.

    In my new paper for the Competitive Enterprise Institute, I note that this frustration is well-grounded. “Today the banking industry is more concentrated than ever,” I write. But I and plenty of others have noted that much of the reason is Dodd-Frank itself, plus the effects of regulation put into place and signed into law by GOP Presidents George W. Bush, Richard M. Nixon, and Dwight D. Eisenhower. To really tackle too-big-to-fail and end bank bailouts for good, I argue, we need to lift these barriers to real competition in banking.

    “In the financial industry, as in any other industry, greater competition can help bring stability, innovation, and choice,” I write. It’s easy to forget that when it comes to bailouts, the financial industry is largely unique. There was virtually no call in recent years to bail out Blockbuster Video, Borders, Eastman Kodak, and, most recently, Radio Shack, even though their bankruptcies cost thousands of jobs and wiped out shareholders

    Why? The short answer is that unlike with bank failures, no consumers were threatened with shortages in supply in these other industries, thanks in large part to new entrants. Blockbuster’s customers could stream Netflix or rent their movies from Redbox. Borders customer could order their books from Amazon.

    Yet both before the financial crisis and after, there has been a dearth of new entrants in banking. In fact, since 2010, only one new bank has received federal regulators’ permission to open—the Bird-in-Hand Bank in the Amish country of Pennsylvania.

  • The SEC Sinks Its Claws Deeper into Executive Pay Packages

    July 14, 2015 11:11 AM

    Once upon a time critics of corporate America complained that executive salaries were too high, and too often disconnected from the performance of the firm. Senior managers are making millions while the company loses money—where’s the logic in that? So today many firms, including large banks and other financial services companies, have performance-based compensation packages—at least some of the money executives make is tied to the firm’s annual profits. Now incentives are aligned smartly, right?

    A potential complication creeps in, however, when a firm needs to restate its earnings. If a major deal goes south and restated earnings are lower than they were initially reported, perhaps we should restate an executive’s compensation as well, the thinking goes. This is the idea behind a provision of the Dodd-Frank Wall Street “Reform” Act. As Andrew Ross Sorkin reports in The New York Times, the Securities and Exchange Commission is currently working on a new rule which would expand this “clawback” concept from where it is already in force among Wall Street firms to all publicly traded companies. If restated profits were lower than they were in the year in which performance-related compensation was paid out, the company can demand that some of that bonus be repaid—as long as three years later.

  • Federal Financial Aid Drives Up Tuition and College Costs, Study Finds

    July 9, 2015 11:49 AM

    The federal government is now admitting that its own financial aid is partly to blame for rising tuitionreports Blake Neff in The Daily Caller:

    new report by the Federal Reserve Bank of New York has found that the massive investment in grants and student loans by the federal government is a major contributor to the unbridled growth in the cost of attending college.

    College tuition rates have consistently risen faster than inflation for some 25 years. One theory for the rise, dubbed the “Bennett hypothesis,” was put forward by Ronald Reagan secretary of education William Bennett, who argued that hikes in government student aid simply gave colleges a free pass to hike tuition.

    Now, the New York Fed’s research suggests there’s some merit to the idea, and that it means the government could be spending billions on education to no effect.

    “While one would expect a student aid expansion to benefit recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect,” the paper concludes.

    On average, the report finds, each additional dollar in government financial aid translated to a tuition hike of about 65 cents. That indicates that the biggest direct beneficiaries of federal aid are schools, rather than the students hoping to attend them.

    As Neff notes, this finding is consistent with some earlier studies on the subject, such as a 2012 paper by Harvard and George Washington University economists, and a 2007 paper that found that higher Pell Grants drove up tuition at private schools as well as out-of-state tuition for public schools.

    Earlier, Andrew Gillen, research director of the Center for College Affordability and Productivity, also reached the conclusion that federal financial aid fuels college tuition increases. In a colloquy on Gillen’s research, I concurred in this conclusion, while also noting that increased federal regulation has also fueled tuition increases—as have rules and red tape imposed by states and accreditation agencies. (A recent report by college presidents notes that under the Obama administration, the Education Department has flooded the nation’s schools with new rules that have never been properly vetted or codified, in violation of the Administrative Procedure Act.)

    Education analyst Neal McCluskey of the Cato Institute cited four additional studies showing that increased government spending on student aid results in large tuition increases.

    In 2011, Virginia Postrel wrote at Bloomberg News about how federal subsidies intended to make college more affordable have instead encouraged rapidly rising tuitions.

  • Dodd-Frank Conflict Minerals Rules Cause Smuggling, Starvation, and Harm to U.S. Businesses

    June 19, 2015 12:36 PM

    The 2010 Dodd-Frank Act effectively restricted U.S. business’s ability to obtain minerals from the war-torn nation of the Congo and surrounding countries. That caused massive unemployment and hunger in the Congo, and huge job losses in mining communities. By driving out Western buyers, it gave Chinese firms a virtual monopoly on some Congolese minerals. 

    Dodd-Frank imposed costly auditing and reporting requirements on companies that use minerals such as tin, tungsten and gold, requiring them to report on their use of minerals not just from the Congo, but also peaceful neighboring countries like Tanzania, which are effectively punished merely for being next to the Congo. At least 6,000 companies are affected, including Apple, Ford, and Boeing, costing them billions of dollars.

    African smugglers have benefited from Dodd-Frank, notes a recent article in Politico, as “clean miners” in the Congo, the world’s poorest country, simply can’t afford to comply with Dodd-Frank’s certification requirements.

    As Politico reported,

    the boycott prompted by the Dodd-Frank Act put thousands of eastern Congolese miners out of work. The World Bank has estimated that 16 percent of Congo’s population is directly or indirectly engaged in informal mining; in North Kivu in 2006, mining revenue provided an estimated two-thirds of state income. But revenues to the provincial government’s coffers fell by three-quarters in the four years before 2012, in part because of what officials called the “global criminalization of the mining sector” of eastern Congo, as encapsulated in laws like Dodd-Frank. The state’s loss is the smugglers’ gain: When the official routes are closed, the clandestine trade picks up the slack.. . .

    Despite Dodd-Frank and the spate of efforts to curb conflict mineral violence in the early 2000s, it appears unlikely that the certification schemes will ever reliably cover the whole of eastern Congo’s mining trade. Clean miners have been squeezed, as the retreat of Western buyers has let Chinese comptoirs gain a near-monopoly on Congolese coltan, allowing them to dictate prices.  

    The efforts to impose some control on the mineral trade . . . .does so at the cost of weakening the already precarious livelihoods of eastern Congo’s diggers and porters and their dependents.

    This harm was completely predictable. As Walter Olson noted earlier,

    Economic sanctions, when they have an effect at all, tend to inflict misery on a targeted region’s civilian populace and often drive it further into dependence on violent overlords. That truism will surprise few libertarians, but apparently it still comes as news to many in Washington, to judge from the reaction to this morning’s front-page Washington Post account of the humanitarian fiasco brought about by the 2010 Dodd-Frank law’s “conflict minerals” provisions. According to reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets.

  • The Right to Choose Your Investment Partner

    June 8, 2015 2:49 PM

    The following is an abridged and revised version of my keynote address to the FinTech Global Expo at the San Diego Convention Center on May 29, 2015. I was introduced by conference organizer Andrea Downs, President and CEO of Coastal Shows.

    In startup investment, there have almost as many important developments in the past three years as there have been in the past 30. Let me take you on a very short trip on my time machine back to the days just before the passage of the Jumpstart Our Business Startups—or JOBS Act in 2012

    In those days—during the reign of the 80-year-old ban of general solicitation of private stock offerings that the JOBS Act repealed—it wasn’t even clear that you could have a conference, trade show, or expo like this one. That was a concern among angel investors I had spoken to interested in holding a trade show, but uncertain of the legality.

    Maybe we can remember the time in which if you were an entrepreneur and weren’t networked in, and you wanted to find an accredited investor, you had to whisper to someone on the street corner: “Hey, are you rich? Want to invest in my company?”

    And it’s amazing that since the JOBS Act—really since 2013, when the SEC implemented Title II and repealed the general solicitation ban—we’re seeing all these platforms like OurCrowd.com and the others being discussed. It’s amazing to see how much that has grown and is getting capital to entrepreneurs.

    We’ve come a long way, yet we have a long way to go. The SEC still hasn’t implemented Title III, so we still don’t have crowdfunded investment for ordinary investors. So ordinary folks can’t share in the dream quite yet.

    But we’re getting there. So much is happening in state legislatures. The Illinois House of Representatives and Senate just passed an equity crowdfunding bill for all in-state residents that’s awaiting the new governor’s signature. Michigan, Texas, Georgia and other states have already enacted similar statutes for their residents.

    One of the reasons I’m so optimistic is that I view the grassroots push to legalize crowdfunded investing for everyone as a freedom movement. Even though the JOBS Act, deregulation, and lifting financial red tape are often associated with Republicans and conservatives, I see this as a broad general freedom movement, similar to the movement for the right to smoke marijuana and to marry your partner of choice.

    My organization, the Competitive Enterprise Institute, looks at Dodd-Frank, Sarbanes-Oxley, and all regulations as a burden to personal rights. After all, what could be more personal than how you invest your money? If you can now choose who your domestic partner is, why in hell shouldn’t you be able to choose who your investment partner is?!

  • Johnson-Crapo's Reemergence Ruins Reg Relief Bill

    May 18, 2015 5:05 PM

    Last year, an overhaul of Fannie Mae and Freddie Mac called Johnson-Crapo—named after then Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho)—went down in flames after observers found that the bill was not reform, but a massive expansion of the government’s role in housing.

    One of the most vocal opponents of Johnson-Crapo was Sen. Richard Shelby (R-Ala.), who voted against the bill in the Senate Banking Committee and blasted it in his statement in committee and it media interviews. “Shelby Opposes Massive New Regulator and Taxpayer Exposure in Housing Regulation Bill,” exclaims the headline of a press release from Shelby’s office on the date of the Senate Committee vote on May 15, 2014.

    Though the bill narrowly passed the committee, support for the bill died on the vine and it was never even brought to the Senate floor for a vote. The bill was torpedoed after vocal opposition from Shelby as well as that from 26 leaders of conservative and free-market groups who signed a letter blasting Johnson-Crapo that was coordinated by the Competitive Enterprise Institute. In addition to CEI, signatories included the Club for Growth, Americans for Tax Reform, Freedom Works, and the American Family Association.

  • Labor Department "Fiduciary Rule" Threatens to Eviscerate JOBS Act Gains for Investors, Entrepreneurs

    May 6, 2015 9:53 AM

    Three years ago, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, modestly but significantly liberalizing securities markets for investors and entrepreneurs. In signing that bill into law on April 5, 2012, Obama paid heed to the wisdom of ordinary American investors and made the case for easing barriers to their investing in startups.

    “Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors—namely, the American people,” Obama proclaimed. “For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”

    But the authors of the Department of Labor’s new proposed “fiduciary rule” don’t seem to share the view President Obama professed on investor choice in signing the JOBS Act. Rather, those who wrote the DOL’s sweeping new seven-part group of regulations that would sharply curtail choices of assets and investment strategies in 401(k)s, IRAs, and other savings plans, appear to share the mindset of Obamacare architect and MIT economist Jonathan Gruber. Gruber has been shunned by former allies since he was caught on camera boasting about how the health care overhaul passed due to the “stupidity of the American voter.”

    By curtailing investment in IRAs, the rule could eviscerate the gains entrepreneurs and savers have made from the JOBS Act in the freedom to raise capital and invest. And the authors of the rule seem to want it that way, for paternalistic Gruberesque reasons. Again and again in the rule, DOL expresses the view that American investors must be protected from their own stupidity. According to page 4 of the rule:

    [I]ndividual retirement investors have much greater responsibility for directing their own investments, but they seldom have the training or specialized expertise necessary to prudently manage retirement assets on their own.

    Therefore, they “need guidance on how to manage their savings to achieve a secure retirement.”

    Can’t savers who feel they need this guidance seek it out from a variety of investment professionals under a system with strong disclosure and anti-fraud rules? Absolutely not, says the Obama administration.

    “Disclosure alone has proven ineffective,” states the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad” (page 36). In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective — or even harmful.”

    So, in the DOL’s view, the only solution is to tax these dim-witted investors—for their own good, of course—and expose financial professionals to a flurry of lawsuits and penalties if administration officials deem their advice not to be in savers’ “best interests.”

  • Gruber's Disciples Gunning for Your IRA and 401(k)

    April 21, 2015 11:32 AM

    Is Jonathan Gruber, the MIT economist who seemingly dropped out of public view after he was caught on camera bragging how he and other Obamacare architects misled the American public, now advising the Department of Labor?

    No evidence indicates that he is, but the authors of sweeping new 444-page DOL regulation that would sharply curtail choices of assets and investment strategies in 401(k)s, IRAs and other savings plans appear to share Gruber’s mindset on the “stupidity of the American voter” (a revelation National Review editor Rich Lowry aptly described as “us an unvarnished look into the progressive mind, which … favors indirect taxes and impositions on the American public so their costs can be hidden, and has a dim view of the average American”).

    Now, President Obama and Secretary of Labor Tom Perez are advancing a new regulatory and hidden-tax scheme while claiming to protect average Americans’ retirement savings from unscrupulous financial professionals. The proposed “fiduciary rule” would restrict the investment choices of holders of 401(k)s, IRAs, health savings accounts, and Coverdell education accounts.

    In a speech to AARP, Obama proclaimed:

    If you are working hard, if you're putting away money, if you’re sacrificing that new car or that vacation so that you can build a nest egg for later, you should have the peace of mind of knowing that the advice you’re getting for investing those dollars is sound, that your investments are protected.

    Similarly, a DOL “fact sheet” describes the rule as “protecting investors from backdoor payments and hidden fees in retirement investment advice.”

    Yet in practice, the rule seems premised on the Gruberite notion that American investors need protection from is their own stupidity. According to the DOL rule:

    [I]ndividual retirement investors have much greater responsibility for directing their own investments, but they seldom have the training or specialized expertise necessary to prudently manage retirement assets on their own. (page 8)

    Therefore, they “need guidance on how to manage their savings to achieve a secure retirement.”

    Can’t savers who feel they need this guidance seek it out under a variety of investment professionals under a system with strong disclosure and anti-fraud rules? Absolutely not, says the Obama administration.

    “Disclosure alone has proven ineffective,” states the rule. “Most consumers generally cannot distinguish good advice, or even good investment results, from bad” (page 91). In fact, proclaims the DOL, “recent research suggests that even if disclosure about conflicts could be made simple and clear, it would be ineffective—or even harmful.”

    So, in the administration’s view, the only solution is to tax these dimwitted investors—for their own good, of course—and expose financial professionals to a flurry of lawsuits and penalties, if administration officials deem their advice not to be in savers’ “best interests.”

  • UK Banks End Reward Programs in Anticipation of Interchange Fee Caps

    April 13, 2015 4:17 PM

    File this one under “we told you so.” The Independent reports a scale-back in credit card reward programs in the United Kingdom:

    The UK’s largest credit card provider has announced that it will no longer offer cashback rewards, labelling them “unsustainable”, after a new EU law was passed last month.

    It is thought that other companies may follow Capital One’s decision, significantly curtailing customers’ air miles and cash bonuses in response to legislation from Brussels.

    The European ruling will cap so-called ‘interchange fees,’ charged by card issuers to retailers when a debit or credit card is used as payment.

    Money reaped by the companies – such as Capital One – under this system allow them to offer customers savings or discounts.

    This is exactly what the International Alliance for Electronic Payments , a coalition that includes CEI, warned about in our letter to EU officials in December:

    Capping interchange fees has been tried in some countries around the world.  Despite claims that these efforts were for the benefit of consumers, the real world results have shown the opposite to be true. In every instance, consumers faced higher fees for banking services, a reduction in benefits and services and saw no return in the form of lower prices from merchants despite promises by merchants and policy makers to pass savings to consumers.

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